By Roger J Kerr
The events and forces that were expected to turn the Kiwi dollar out of the 0.8000’s and drive it downwards have prevailed and delivered the lower currency value.
The list is long and constructive - lower global growth, weaker US sharemarkets, interest rates lower for longer, lower commodity prices (particularly WMP), a weaker Euro currency value on no credible solution to the European debt crisis and finally the “coup de gràce” hitting the screens early Friday morning as Fitch downgraded NZ’s sovereign credit rating.
No-one was really expecting the rating agencies to suddenly mark New Zealand down at this time, however given the high external debt levels and Current Account deficit the prospect of lower commodity prices and higher internal budget deficits going forward on top, was enough to turn Fitch’s and S & P’s measurement metrics.
However, it did seem that Fitch suddenly realised that New Zealand’s external debt to GDP ratio was above other AA rated countries and it was an outlier that could not be allowed.
Our total external debt ratio to GDP has actually reduced over the last three years; however what has changed is the investment world has become much less tolerant of high debt levels as a result of the European debt crisis.
Our ability to service and repay debt has not materially changed, the world’s sensitivity to debt has changed and a lower sovereign rating is the result.
The pressure is now firmly on the National Government to meet their forecasted return to budget surplus by 2014/2015.
The task is much harder than a few months ago due to higher Christchurch earthquake costs and slower GDP growth reducing tax revenues into the Government.
The Government needs the economy to grow and, as always, that can only come from the engine room of the export sector.
Thankfully, the now lower NZ dollar value will be a boost to exporter’s confidence, output and profitability.
No chart with that title exists.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
18 Comments
Roger, sometimes you worry me. TYalking to friends over the weekend they are all expecting commodities to tank to varying degrees, looking at the charts Ag products are way off highs. Record grain harvests even with some climatic challanges have seen Australia produce an extra 10 million tonnes and other countries are looking at similar production increases, who is going to eat all this grain well unless we all double our daily bread intake its going to be Chuckens, pigs and dairy cows.
Some of the news from the UK is a worry
>>>>
Protectionism beckons as leaders push world into Depression
The world savings rate has surpassed its modern-era high of 24pc. This is the killer in the global system. It is why we are at imminent risk of tipping into a second, deeper leg of intractable depression.
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8802462/Protectionism-beckons-as-leaders-push-world-into-Depression.html Banking crisis set to trigger new credit crunch The global financial system is on the edge of a new credit crunch as the cost of insuring the bonds of banks across the world hits new highs, analysts have said.Cedit default swaps on lenders as far afield as China and Australia, countries that until recently seemed immune to the chaos, have doubled in the last two months to levels not seen since the financial crisis.
In Europe, French and Belgian government officials are due to meet on Monday to discuss the crisis enveloping Dexia as speculation mounts about a possible break-up of the Franco-Belgian lender.
Last week, the cost of insuring Dexia bonds hit an all-time high of 900 basis points, nearly double the level just two months ago, meaning the annual cost to insure €10m (£8.59m) of the bonds is £900,000.
"The money ran out in June and what you are seeing now is the beginning of a new credit crunch, except this time it will be truly global, not Western," said one senior London-based credit analyst.
Australian banks, which have been major users of wholesale funding markets, are among those getting caught in the new crunch. Credit default swaps on the bonds of National Australia Bank and Australia and New Zealand Banking Group are not far off double the level they were just two months ago and last week reached 12-month highs
http://www.telegraph.co.uk/finance/financialcrisis/8802846/Banking-crisis-set-to-trigger-new-credit-crunch.html"who is going to eat all this grain" Well we seem to be breeding ourselves to extinction....
My understanding is we have been eating down our reserves of grain for a few years, so a bumper harvest will replenish that....also when we look at a bumper harvest in OZ that maybe offset or cover a huge loss in say Russia...we are very close to being not able to feed ourselves....
I agree on commodities tanking mind.....milk will tumble and the highly leveraged dairy farms will be under pressure and hence the banks....
Great links btw
regards
steven, have a hunt through this website, stocks are good and 2012 looks like record planting. USA just found an extra 5 million tonnes.
http://www.agrimoney.com/news/us-finds-extra-corn-sending-prices-to-2011-low--3665.html
over in the UK they have gone mad
http://www.agrimoney.com/news/farmland-prices-dip-in-uk-amid-overheating-fears--3652.html
CO, that site says that brazil is dry, Im dry too, not comfortable, ridges browning off, cold late season.
http://www.agrimoney.com/news/dryness-risk-to-brazil-soy-as-la-nina-fea…
I thought sugar cane didn't mind the dry. But I maybe mistaken. :-)
Not a lot of grass up here either Aj. Was talking to neighbour and he said that though there isn't much feed his cows are milking better now than they have for the last 3 years. Though it is quite wet here today. Hope you get some rain.
Fonterra is 15% up in milk take overall - 19% in lower north island, and are coping with a 'wave of milk'. Even our darstardly competitiors are cancelling their orders for DIRA milk. :-0
Down on the farm the area is the wettest the old timers have ever seen it. We aren't getting a lot of rain at once just a bit every day.
CO here is the report on ethanol
http://www.agrimoney.com/news/falling-corn-price-leaves-ethanol-plants-…
Roger, you are talking drivel. I don't like you mixing true and untrue statements in the same sentence in order to arrive at a misleading conclusion:
Our ability to service and repay debt has not materially changed That is utter rubbish - we are an exporting nation and demand for our products is falling as the world, including our major export partners, enters a depression. And as S&P explained, our current account deficit is not going to turn around any time soon i.e. as a nation we are, and will continue, going backwards at pace.
the world’s sensitivity to debt has changed True, but not relevant
and a lower sovereign rating is the result. Now the false and misleading conclusion.
Chris Martenson http://www.chrismartenson.com/blog/daily-digest-101-reign-1-1m-protestors-occupy-wall-street-young-farmers-burdened-high-startup-c links to this report with
"While both analysts share a devotion to hard money "Austrian" economics, some differences in opinion arise, including best choice for "safe haven" currency. Candidates considered include the Swiss franc, Norwegian krone, Singapore dollar, and the Australian dollar. They discuss in detail the potential for a collapse, or resurgence, of the struggling euro. They also evaluate the future prospects for the highly managed Chinese renminbi whose peg against the U.S. dollar has been one of the dominant factors shaping the global economy. Along the way, they discuss other currencies before finally settling on their "five favorites" for the next five years."
And if you follow the link http://www.newcurrencyreport.com/?utm_source=website&utm_medium=email&utm_campaign=2011currencyreport
you will find the kiwi rated in there. Can't see how that is going to help the downward pressure.
It will indeed but not because of the points you raised.
A low value currency is highly inflationary, all other factors being held constant. As GDP is a disguised measure of the money supply we will see GDP rise. If you have a sound currency (gold standard) GDP would never change because the money supply would not be changing and there will not be more money available to bid up the prices. An increase in production would result in falling prices (of that good) but the same total money will be spent in an economy. Therefore GDP will rise but because of inflation not because of exports.
"The Government needs the economy to grow and, as always, that can only come from the engine room of the export sector." There are more than just exports that make up GDP. If the value of the NZD were increasing NZ consumers would have greater purchasing power and therefore be able to buy more stuff. Exports are not the only way to grow your economy, remember the reason for exporting is so that you can import.
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